Durable Expenditure Dynamics under Time-Varying Income Risk

Erik Öberg and Karl Harmenberg
Additional contact information
Erik Öberg: Stockholm University
Authors registered in the RePEc Author Service: Erik Öberg

No 672, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: We explore the relationship between fluctuations in income risk and expenditures on durable goods. First, we study the effect of fluctuations in income risk in a tractable partial equilibrium model of durable expenditure decisions featuring non-convex adjustment costs. Non-convex adjustment costs imply that households follow an Ss-type decision rule. In this setting, temporary increases in income risk raise the option value of postponing purchases. With a mean-preserving income process calibrated to match the US business cycle swings in income risk, the fall in durable expenditures upon entering a recession is three times as large as in the same model without adjustment costs. Second, we investigate the relationship empirically. Using micro level data from the Italian Household Survey of Income and Wealth, we estimate the effect of fluctuations in unemployment risk on durable and non-durable expenditures. We find that durables respond strongly to an increase in unemployment risk, while the effect is negligible and statistically insignificant for non-durable expenditures. We also provide evidence using US time series data.

Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
https://red-files-public.s3.amazonaws.com/meetpapers/2016/paper_672.pdf (application/pdf)

Related works:
Working Paper: Consumption Dynamics under Time-Varying Unemployment Risk (2019)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:red:sed016:672

Access Statistics for this paper

More papers in 2016 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().